A workplace pension scheme is a way of saving for your retirement through contributions deducted directly from your salary. Your employer may also make contributions to your pension through the scheme.
There are two types of workplace pension schemes available:
- Occupational pensions
- Group personal pensions (GPPs)
1. Occupational pensions
Occupational pensions schemes are set up by employers to provide pensions for their employees. There are two different types of occupational pensions:
Final salary scheme
In a final salary scheme, your pension is linked to your salary while you’re working, so it automatically increases as your pay increases. Your pension is based on your pay at retirement and the number of years you have been in the scheme. In most final salary schemes, you pay a set percentage of your wages and your employer pays the rest.
Money purchase scheme/ Defined contribution scheme
In the money purchase scheme the money you pay into it is invested with the aim of giving you an amount of money when you retire. Your pension is based on the amount of money paid in and how well the investments have performed. Usually you pay a percentage of your wages into the scheme and your employer can also pay regular amounts in but they are not required to do so.
2. Group personal pensions (GPPs)
Group personal pensions work in a similar way to the ones you can arrange yourself. Your employer chooses the pension provider but you will have an individual contract with the pension provider. You pay contributions into your pension fund direct from your wages. The money is invested to grow your fund (usually invested in stock and shares, along with other investments) which you will use as your pension when you retire.
What is Automatic Enrolment?
The law on workplace pensions has changed. Under the Pensions Act 2008, every employer in the UK must put certain staff into a pension scheme and contribute towards it. Automatic enrolment applies to all employers who have at least one member of staff. It doesn’t just apply to businesses, if you employ someone directly to work for you i.e. a cleaner, personal care assistant you are classed as an employer and will need to ensure that any eligible employees are enrolled into a workplace pension.
When does automatic enrolment start?
Automatic enrolment is being introduced in stages up until 2018. The largest employers started first (250 or more employees), followed by medium- sized and then small employers. The complete timetable showing the automatic enrolment starting dates can be found on the gov.uk website.
Who will be automatically enrolled?
Whether you work full time or part time, your employer must enrol you in a workplace pension scheme if:
- You are not already in a suitable workplace pension scheme
- You are at least 22 years old, but under the State Pension age
- You earn more than £10,000 per year (2016/17)
- You work in the UK
How much will I have to contribute?
There is a minimum total amount that must be contributed by the employee, the employer and the government in for form of tax relief. The total minimum contributions for 2016/17 is set at 2% of the employee’s earning (0.8% from the employee, 1% from the employer, and 0.2 as tax relief).
The minimum contributions applies to anything earned over £5,824 (in the tax year 2016/17) up to a limit of £43,000. This includes overtime and bonus payments. So, for example, if an employee was earning a salary of £20,000 their qualifying earnings are calculated as £20,000 – £5,824 = £14,176 per year. The contributions would be:
Employer: £14,176 x 1% = £141.76 per year (£11.81 per month)
Employee: £14,176 x 0.8% = £113.41 per year (£9.45 per month)
Tax relief: £14,176 x 0.2% = £28.35 per year (£2.36 per month)
Total contribution: £283.52 per year (£23.63 per month)
Increases in the minimum contribution:
- From April 2018-March 2019 the total minimum will change to 5% of the employees earning (2.4% from the employee, 2% from the employer and 0.6% as tax relief)
- From April 2019 onwards the total minimum will change to 8% of the employees earnings (4% from the employee, 3% from the employer and 1% as tax relief)